Are Aggressive Price Negotiations With Vendors Damaging Company Profits?

When you run your own business, you definitely understand the value of the money you’ve put into the business. Owning a business or a start-up company is a huge responsibility and every decision you make will definitely have a domino effect on the business as a whole. As a corporate employee, you also have a duty to your company to ensure that you get the best deal for the company.

One of the most important decisions is to negotiate prices with your vendors to ensure a good inflow of services that your company needs. This decision making should be taken seriously and it’s good to always have someone else help you with these decisions. This article by ThunderQuote seeks to help with that.

One of the main things you need to pay attention to when you have your own business unit is controlling the amount of money you are using every month. When starting out, you have working capital and initial financial projections as well as financial goals to achieve. Therefore, price of supplies and services needed to run your business will be prioritised. However, with the prices of literally everything increasing, there lies a problem.

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The Million Dollar Question :

Do price negotiations with vendors help or hurt your company bottom line?

This article will try to help you find your answer to that question. Some people may say that being frugal is smart and we’re not here looking to break that bubble but rather is it worth it to save a small amount of money now on products with not so great quality and realise that it will cost you in the long run? So do you still negotiate or pay for quality?

What Is Considered Price Negotiating?

Negotiating has become part of our everyday lives, going back as far as when humanity started using the barter system. So it isn’t a foreign act and we should be well-versed by now – especially people in the business world. It is known that poor negotiation can be crippling to the business. However, some people prefer to follow their feelings and make decisions but in negotiation, emotions should not take centre stage but rather a proper well thought out strategy.

Price negotiation is when one or both parties begins to focus on price as a bargaining counter to the exclusion of other, more important factors such as value-delivery, reliability and flexibility.

You ego should be in check and should not come out to play when you are negotiating with the big guys. You will need a lot of discipline to make sure you hold your ground and get what you want at a price you are willing to pay.

So How Do You Negotiate?

Your main focus should be before the act even begins. Preparation is key here. Know who you are negotiating with so that you can capitalise on their strengths and weaknesses. Also, showing them that you have done your research may impress them and they might offer you a lower price after all. In addition to that, asking your friends in the industry who may have worked with this company before is also helpful. Sometimes people have a certain pattern that you can use to your advantage.

You should also go into the room with a strategy. The first offer made is usually the benchmark and that offer will set the pace for the entire discussion. You will most likely never get your first offer so always set it high and make sure it’s a bold amount. Starting with a higher amount and lowering it later gives the illusion that you actually are giving the other party the upper hand. As a buyer, never reveal your exact budget because sellers can try to fit their products into your budget while conveniently forgetting to mention all the extra and hidden costs that will come out and pull the rug from under you later on.

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When to Pay More For Quality Rather Than Drive Down On Price (And Cut Corners)?

When it comes to a business, your main goal is to always stay on top of your chain and make sure that you dominate the market. To do this, customers need to be able to trust that whatever service or supplies that you are selling is always the best quality. If you decide to cut corners to save money now, how will that pan out in the long run? For example, buying office supplies, sure buying a cheap printer may mean you get to save a few hundred dollars, but cheap printers usually mean more expensive ink and ink cartridges that do not last long. So, if you calculate accordingly, this will mean that you spend more money in the long run.

This is the same when it comes to much bigger contracts and services that cost a whole lot more money. Our advice is to always pay for quality because this is your reputation that is on the line. To be successful in any industry, you need to uphold a great reputation. No one will come to you if there even is one or two reviews about your products not lasting or not reaching a certain level of expected standards.

This is known as the value based purchasing which is pretty self-explanatory. Practicing this makes sure that your company always looks to the bigger picture and makes decision based on those observations. Implementing this just shows you how much you can save in the long run if you invest in quality instead of trying to cut corners all the time.

The framework to make use of when undertaking value based purchasing is that of TCO (Total Cost Of Ownership).

Total Cost Of Ownership (TCO) includes:

Cost of the initial project

Total cost of maintaining the product / service output

Time to breakdown of the service output

Communications time

Project management time

Management oversight costs

Generally, you’d soon realise that the TCO of a service delivered can be several times that of the initial spending, you’d pay a lot more attention to the value delivered and quality level of the vendors.

Should You Always Focus On Negotiation?

If you feel like you have the upper hand and that the quality of the services can be delivered to be exactly the way you want it to be, then sure, go ahead and negotiate. But the case isn’t always that great and the more you negotiate the more the quality of your product plummets. Sellers need to make their money too and if you take away from their pay out they can take away from your products.

The best advice would be to always look at the quality of the product and how it will benefit you in the long run. Keeping a business afloat and making sure it’s successful is hard enough, this is one way to make sure your services stay at a certain standard to ensure that your customers always come back for seconds!

ThunderQuote is the most comprehensive business services portal in Singapore, Australia and ASEAN , where hundreds of thousands of dollars of procurement contracts are sourced every month by major companies like Singapore Press Holdings, National Trade Union Congress and more.